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San Fernando
Thursday, Sep 21, 2023


Mark your calendar. The silly season for investing has begun. Between now and the end of the year, we’ll be facing three major demons: First, the “Traditional October Willies.” We will hear a lot of stories about the resemblance between October 1929 (or October 1987) and October 1999. I’ve heard the stories so many times, I’ve begun to think of October 1929 as the investor version of “The Monkey’s Paw” story. Second, we’ll have to survive the “Year-End Tax Selling Season.” Between now and the end of the year, any stock that has been a disappointment is likely to be sold so a capital loss can be realized. In a market with zero tolerance for disappointment, this can mean still deeper declines for any stock subject to uncertainty or doubt. That’s a lot of stocks. And finally, we’ve got the end-all event, the “Great Millennium Clearance Sale.” This year and this year only, we’ll have to deal with the folks who’ll want to sell some shares “just in case” the Y2K bug is a real problem. Mix all three together with the fact that we’ve had a nonstop bull market since 1995, and things may get pretty dicey, making the next four months a good time to have your head on straight. Which is why I have a book for you to read. No, it’s not one of the half-dozen books on electronic day trading that have barged their way onto my desk. Nor is it a tome on the fine points of derivatives, understanding technology stocks, learning the rules of the new economy, or mastering emerging markets. Indeed, this book isn’t about investing at all. And a medical doctor wrote it in 1980. It’s “Feeling Good: The New Mood Therapy” by David D. Burns (no relation). Written to examine the sources of depression, it is a self-help book that doesn’t require years of therapy, family exhumation and the like. Now I’d like to suggest that investors read this book and use it to examine their habits of investment thinking. Why? Because Dr. Burns believes that we create or worsen many of our personal problems through a small number of cognitive disorders habits of thinking that distort both our perception and our response to events. Understand your habits of thinking, he says, and you can improve your life. The same cognitive disorders also affect our investment decisions. Dr. Burns identifies 10 of these disorders. I believe seven of them can be found in investment decisions. ? All-or-nothing thinking. This happens when you start seeing things in “black and white categories.” The best example of this is the investors who are at both extremes of the market those who own gold in preparation for the investment apocalypse and those who own Internet stocks purchased on margin, in the belief that they are only a year away from massive wealth. ? Overgeneralization. Investors who see a single down day or week as the beginning of the end, when it’s really just another week in the market. ? Mental filter. Somehow you can focus only on a single positive or negative detail and all other evidence is ignored. Many chat-room investors suffer from this disorder, using one single shard of information as justification for an entire investment position. ? Disqualifying the positive (or negative). You discard positive or negative news because it “isn’t important,” given your pre-existing opinion. ? Jumping to conclusions. Dr. Burns divides this into two parts. One is “mind reading,” in which a person assumes they know what another is thinking. In the investment world, this would mean thinking that you know what the market is going to do next. No one knows what the market is going to do. “Fortune teller error” is another form of the same disorder. In this version you treat your own prediction as though it was a historical fact. ? Magnification or minimization. Sometimes called “the binocular trick,” the investor loses his sense of proportion, putting excess weight on the positive (or negative). ? Emotional reasoning. An investor who is feeling bad assumes that the world feels the same way and everything is bad. You can learn the basics of this book in the first 43 pages of the $6.99 Avon paperback. It’s more than worth the investment of time. Q & A; I am 45. My wife is 39. Our home is worth about $165,000, and we owe about $70,000 on it. We have 13 years left on our 6.25 percent, 15-year refinanced mortgage. We have equities that total more than $900,000. If we decide to eliminate the mortgage (sure sounds appealing) by selling some stock, I would fear one thing: increased spending, especially on my wife’s part. Believe me, it would happen. Right now she spends more than I make, and she pays for it out of her broker account (dividend income). On her behalf, at least she usually spends it on home improvements. The mortgage bank presently collects our monthly payment through electronic transfer. I would like to set up automatic electronic payments into an investment situation of some kind for the same amount of our mortgage payment. Will mutual fund companies do this? What would you suggest? (Yes, my 401(k) is maxed out.) M.J., Chester, Va. Lower your fixed overhead and pay off the mortgage. It isn’t providing you with any tax benefits so its real cost is 6.25 percent, a rate you’d have difficulty beating. In addition, if your circumstances changed, your wife could slow her spending while the mortgage holder would continue to insist on regular payments. Relatively speaking, your wife is probably a wildly reasonable person compared to a mortgage lender. Most mutual fund companies offer arrangements for automatic drafts on your checking account, often starting with as little as $50 a month. Significantly, they often waive their minimum initial investment requirement for such accounts. So it would be very easy to substitute an automatic investment payment for an automatic mortgage payment. Finally, it’s very rare that both husband and wife have the same spending and saving agendas, and it is unreasonable for one to expect the other to adopt his or her position in toto. What you can do is sit down and ask each other very specific questions about what makes you feel good and what makes you feel secure. There is usually some level of “secure” that will allow one spouse to relax, and some level of spending that will allow the other to avoid feeling deprived. Syndicated columnist Scott Burns can be reached by fax at (214) 977-8776 or by e-mail at scott@scottburns.com.

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